Forex Broker Spreads and Fees
Broker spreads and fees may not be the difference between profit and loss, but who wants to spend more than necessary to trade the foreign exchange market?
No one.
Trading should be easy. It should also be inexpensive. We’ll show you how you can evaluate brokers on the basis of forex trading costs, with particular emphasis on spreads and fees.
Broker Spreads
Depending on the amount of currency you trade, broker spreads may be the most expensive cost to your trading plan, or perhaps the least expensive. Do take care to note that brokerage spreads scale. That is, if you were to purchase 10,000 units of currency (one mini-lot) at a 4 pip spread, your cost would be 4 units of currency. In a pair where the USD is the counter currency, this spread equals $4.
If you were to trade 100,000 units (1 full lot) of a dollar-counter pair, then the cost would be 40 units, or $40.
Broker speads mean very little to inactive traders, or those who trade with relatively small amounts of money. However, for active day traders and traders who trade forex with large amounts of capital, the spreads can grow quickly.
Action steps:
1. Identify pairs you want to trade on the foreign exchange market.
2. Get a feel for broker spreads by contacting customer support to reference spreads on pairs you actively trade.
3. Consider the volume of currency you intend to trade.
4. Weigh the monthly cost of spreads against the benefits of trading with a particular broker.
Forex Account Fees
It may seem fairly simple to set up a forex account at a brokerage firm—and it is, at least for you. For the broker, however, maintaining accounts that are not active is expensive. Monthly statements, accounting, and communicating with customers all come at a cost to the broker.
Some brokers charge forex account fees for certain actions within your account including:
• Deposit
• Withdrawal
• Currency conversion
• Maintenance fees for trading software
These costs can add up over time. To minimize the brokers’ costs, a broker may charge a fee for deposit and withdrawal. A forex broker might also limit the number of deposits or withdrawals by ACH transfer (digital checking), bank wire transfers, or mailed paper checks.
Since most brokers are very accommodating here, it doesn’t really make all that much sense to use a broker that makes deposits and withdrawals a pain in the neck. For this reason, we recommend scoping out the fees and deciding for yourself which brokers make sense.
Consider the following:
1. How many deposits or withdrawals do I plan to make per month?
2. Does the broker have a balance cut off at which fees are eliminated…say, $10,000 account balances?
3. Will I reach an activity threshold that will lower or erase my costs?
4. Can I get the same service at another broker for a lower fee?
5. Are the fees too small to matter? Too large to ignore?
